Neo-Chartalism Reconsidered

I must admit, it has me taking a second glance at MMT theory, frankly, because his paper is the first to calmly explain (at least one piece of) MMT in a way that doesn't alienate, and in a way that bridges some of the language gaps and misleading or just factually wrong (given common usage of terms) statements by MMTers. Ahh the power of words....

Some 'aha!' passages:

Another problematic statement is that the government has to run deficits, at least over the long run, for the public to get access to larger cash balances (high powered money). As Wray (1998, p. 123) puts it, “persistent deficits are the expected norm”, that is, “normally, taxes in the aggregate will have to be less than total government spending due to preferences of the public to hold some reserves of fiat money” (Wray 1998, p. 81). If the government was running persistent surpluses, the public would “run out of net money hoards” (Wray 1998, p. 79). While I would certainly agree that government deficits in a growing environment are appropriate, as it provides the private sector with safe assets, which can grow in line with private, presumably less safe, assets, it is an entirely different matter that government deficits are needed because there is a need for cash.

Even if the government keeps running balanced budgets, central bank money can be provided whenever the central bank makes advances to the private sector. Wray (1998, p. 79-80) himself recognizes this, as he later adds that “a surplus on the Treasury’s account is possible as long as the central bank injects reserves through purchases of assets or through loans of reserves”. Presumably, what he has in mind, as we will see soon, is that total government expenditures include “spending” by the central bank, when the central bank purchases private assets or claims on the private sector and adds them to the asset side of its balance sheet. But this is an odd way to define government spending.While this terminology problem is easy to solve, things may not be so simple with the oft-made statement that “government spends first”, a statement that, of course, has some relationship with the causal sequence mentioned when discussing the links of neo-chartalism with circuit theory. This expression comes back like a leitmotiv on many of the blogs devoted to modern monetary theory, but it can also be found in academic writings: “Government spends simply by crediting a private sector bank account at the central bank. Operationally, this process is independent of any prior revenue, including taxing or borrowing” (Mitchell and Muysken 2008, p. 209); “The government spends simply by writing Treasury cheques or by crediting private bank accounts” (Tcherneva 2006, p. 78). These statements are at best misleading. They skip one fundamental step that makes incomprehensible the leitmotiv sentence that “government spends first”. Any agent must have funds in a banking account. Before being able to spend, the Treasury must somehow replenish its deposit account at the central bank (or at private banks).

This step is often skipped because neo-chartalists prefer to consolidate the central bank and the federal government into one entity, the State. Now, in itself, such a consolidation is not illogical. Other authors, such as Godley (1999B), have on occasion consolidated the central bank with the government. But such an integration may not be appropriate for the purpose….

The purpose of this whole exercise is to show that there is no point in making the counter-intuitive claim that securities and taxes do not finance the expenditures of central governments with a sovereign currency. Even in the case of the US federal government, securities need to be issued when the government deficit-spends, and these securities initially need to be purchased by the private financial sector….

...neo-chartalism carries some excess baggage, which must be gotten rid of. In trying to convince economists and the public that there are no financial constraints to expansionary fiscal policies, besides artificial constraints erected by politicians or bureaucrats that believe in mainstream theories and in the principles of sound finance, neochartalists end up using arguments that become counter-productive. There is nothing or very little to be gained in arguing that government can spend by simply crediting a bank account; tha tgovernment expenditures must precede tax collection; that the creation of high powered money requires government deficits in the long run; that central bank advances can be assimilated to a government expenditure; or that taxes and issues of securities do not finance government expenditures. All these counter-intuitive claims are mostly based on a logic that relies on the consolidation of the financial activities of the government with the operations of the central bank, thus modifying standard terminology. I believe that such a consolidation leads to the avoidance of crucial steps in the analysis of the nexus between the government activities and the clearing and settlement system to which the central bank partakes, and hence leads to confusion and misunderstandings. And so do references to a leveraged vertical component of the money supply.

It's important to note that Lavoie's paper focuses only on the fiscal/monetary settlements relationship with MMT. Some of the other ideas of MMTers (like a government-mandated and set fully employed workforce - employment targeting) are still quite a bit harder to swallow, but I'll continue to keep an open mind.

Finally, Lavoie's paper is an exercise in positive economics, not normative economics. For me, it is still an altogether different (and potentially more important) question whether we should be using strong fiscal policy tools to guide an economy, regardless of whether or not there are any direct financial constraints, as there most certainly are other constraints that need be considered, not the least of which are logistical (politics) and the reality that fiscal policy has been shown to be very messy in practice, and one need to be very careful about discussing fiscal policy in the vacuum of a research paper. That is, at the end of the day we will likely still have the debate about the merits of functional finance.

79 comments:

I'm glad to see you're giving chartalism another chance. Frankly though, i think that if you read the academic literature after reading some of the blogs (or even the comments from non-academic chartalists) you're concerns would have been partially alleviated.

as I've argued elsewhere, I think you're criticisms of the job guarantee is from willful misinterpretations or ignoring the historical evidence.

The unfortunately named Job Guarantee (JG) or Employer of Last Resort (ELR) is a MMT policy proposal, it's different from descriptive MMT which aims at describing the details of our actual monetary system.

First of all, the JG should be renamed to public works. Unemployment offices should be renamed to employment offices, where anyone able and willing to work can get a job doing community service. There are numerous social benefits both to the worker and the community they serve, but it is also an anti-corruption tool. Given politician's proven love for rewarding campaign donors every chance they get, this will take away their justification they call it(fiscal stimulus) which in large part doesn't go to the things with the highest spending multiplier (direct job creation for the unemployed) and is gimmicky- not the right size, not the right duration.

Most economists use the NAIRU as their definition of full employment because they haven't figured out how to solve the unemployment problem without causing inflation. But MMTers have. See Pavlina Tcherneva's 'Keynes's Approach to Full Employment' to see how this can be done. The TINA myth must die!

MMT is a a fundamental rethinking and reform of the conventional fiscal policy levers to bring involuntary unemployment down to zero without causing inflation. I shared it with you, hoping you'd share my love for great ideas. I'm glad for your open mindedness.

I'm not discounting the basic "descriptive" nature for MMT, but its usefulness will be proven not in just in its ability to explain relationships in the real economy, but it's prescriptions as well.

I personally don't think MMT has 'solved' the inflation problem, precisely because their prescription relies on politicians or political institutions to know how much is too much - though I agree inflation is not the real big problem here.

Inflation to me is really a minor problem compared to the bigger problem of how such a program would be run dynamically efficiently and with minimal moral hazard, perversion of incentives, and corruption of the system.... that hasn't been answered in what I've read very well.

I don't disagree with 90% with what you've said. Though I would add that it wasn't just the MMTers that were sounding alarms...it was a good chunk of heterodox economists in general. Hence why I'm contributing to the new 'anti-Mankiw' movement. MMT is but a piece of the larger understanding to how the economy may truly work as opposed to how mainstream econ has distorted reality.

I'm not discounting the basic "descriptive" nature for MMT, but its usefulness will be proven not in just in its ability to explain relationships in the real economy, but it's prescriptions as well.

I think you'd agree an essential first step before you can make coherent policy is to first make sense of the existing system. The MMTers were sounding the alarms when the details of the euro were still wet ink, they were marginalized but now you can see they were right for the right reasons. They were sounding the alarms about the housing bubble and subsequent financial crisis. They were also predicting in real time the stimulus is too small and too poorly targeted. That QE and QEII are not going to get the economy moving and not be inflationary except for the rush of money into commodity markets driven by people fearing inflation (the cosmic joke). They knew that high interest rates on tsys weren't a risk from all this deficit spending. These are just some off the top of my head. I personally don't think MMT has 'solved' the inflation problem, precisely because their prescription relies on politicians or political institutions to know how much is too much

Not the inflation problem, but the problem of intentionally keeping people unemployed to control inflation. That's what politicians are giving us now with NAIRU! MMTers aren't naïve about political incompetence or corruption, hell they've been writing about it every day and are the only group of economists I know of who incorporate control fraud into their analyses! They aren't naïve about labor markets either. They begin with the stylized view that there is no reason to think that the economy driven by private actors using profit motive alone will EVER gravitate towards full employment. To the contrary there are many reasons to think full employment is the exception, not the norm. It is BECAUSE they are aware of all of this that they say we need a bottom up, decentralized, solution to involuntary unemployment.

MMT is but a piece of the larger understanding to how the economy may truly work as opposed to how mainstream econ has distorted reality.

MMT is unique from other schools of thought in that it takes good ideas wherever they come from in their efforts to make sense of reality, they've got a delightfully interdisciplinary approach that incorporate criminologists, bankers, central bankers, fund managers, anthropologists, and draw from thinkers from numerous schools of economic thought.

What I dislike about just about every other "economic school" is their unwillingness to leave model land and TRY to understand reality. I know you share some of these concerns, hence your blogs name. MMT strives to include every relevant insight in order to come up with the best policy, really that's the best anyone can do isn't it?

I think MMT is interesting but has a big flaw. I have written up an introduction to MMT that I think makes it much easier to understand. I also explain the flaw they have. Basically they think monetizing 30 year bonds with fresh new money does not matter. However, history shows us this is inflationary. http://pair.offshore.ai/38yearcycle/#chartalism

Garth Brazelton

About Me

I work for the Indiana Economic Development Corporation as the Director of Operations and Business Systems, and I teach macroeconomics at Indiana University (Indianapolis). Previously, I was an Economist at the US DOT in Cambridge, MA. This blog does not represent the opinions of any of these organizations.